FINRA Orders RD Capital Group and Its President to Pay $1 Million for Fraudulent STRIPS Markups

The Financial Industry Regulatory Authority says that RD Capital Group, based in Puerto Rico, and its president Ramon Luis Dominguez have agreed to pay $950,000 in restitution plus interest to three clients over fraudulent and excessive markups involving the sale of U.S. Treasury Separate Trading of Registered Interest and Principal Securities, also known as STRIPS. The firm and Dominguez are also to pay a $50,000 fine, while the latter was suspended for 30 days as a principal and in every capacity for 5 business days.

According to FINRA, RD Capital and Dominguez sold more than $34 million in US treasury STRIPS to three clients between August and August 2005. They made the sale while charging $1,289,727 in total markups. However, FINRA says that Dominguez neglected to tell the clients how much of a markup they got-from 3.5 – 6.2%-and that these markups were fraudulent and too much because they were more than what the market conditions warranted.

STRIPS are zero-coupon securities created from U.S. Treasury bonds by “stripping” the future interest payment oblitations from the final principle payment obligation on those bonds, then selling each of these separately at a discount. FINRA mandates that firms make sure customers are fairly charged for STRIPS transactions, with the cost for effectuating the sale, profit by the dealer or broker and the expertise provided, the total cost of the transaction, the financial product’s availability, the instrument’s yield or price, and other factors taken into consideration.

By agreeing to the terms of the settlement agreement, RD Capital Group and Dominguez are not admitting to or denying wrongdoing.

More about STRIPS:

• STRIPS can be bought or held via government securities dealers and brokers.
• STRIPS cannot be sold or issued directly to an investor.
• An investor receives payment from STRIPS upon maturity.